An unsecured bond, usually called a debenture bond in the United States, is a bond that is not backed by a claim on any specific property or other collateral. Bondholders rely on the issuer's general creditworthiness and its promise to pay. The main entry covers how debentures work, how they are governed and how the term differs between countries.
How unsecured bonds compare
The alternative is a secured bond, which gives holders a legal claim on particular assets, such as real estate or equipment, if the issuer defaults. Because unsecured bondholders have no such claim, they rank as general creditors in a bankruptcy and are repaid only from assets left after secured creditors are satisfied. Some unsecured bonds rank lower still, as subordinated debt.
To make up for this risk, unsecured bonds usually pay a higher interest rate than secured bonds from the same issuer. Even so, most bonds issued by large, financially strong companies and by governments are unsecured, because investors are comfortable relying on their overall strength. The issuer's credit rating plays a large part in setting the rate.
Unsecured bond indentures often include protective terms, such as a negative pledge that stops the issuer from giving other lenders security over its assets without giving the same protection to these bondholders, and limits on further borrowing.